Ukraine Crisis Highlights Ugly Global Energy Truths

Anyone who thinks the crisis now unsettling Ukraine is purely about a people's quest for democracy and "the madness" of Vladimir Putin would be mistaken.

Ukraine, a semi-failed state due to energy debt and corruption, merely illustrates the new energy politics now unsettling governments from the United States to Crimea. It represents our collective global future, should governments and citizens continue to ignore energy flows and budgets.

The story should be familiar to most North Americans. In U.S. political lingo, Ukraine is a blue state dependent on energy imports from Russia, the powerful red state next door. They share a tense master-slave relationship.

The West, including the fantastically indebted G7 club, thinks it has some moral authority in this dispute, but has its own shackles to worry about. It doesn't export much energy these days, and it is singing the economic stagnation blues because cheap energy is disappearing.

Moreover, Western leaders ignore the realities of a shrinking global economy that can't grow on high-cost energy.

Russia, a true petro state, sits on one-fifth of the world's natural gas supply. About one-third of the natural gas burnt in Europe comes from Russia via Ukraine, which once housed the Russian capital centuries ago. In addition, Russia almost exports as much oil as Saudi Arabia.

Not surprisingly, Putin gets his political mojo from oil and gas revenues just as Margaret Thatcher once secured her power base on proceeds from the North Sea. Nearly 50 per cent of Russia's total budget depends on the sale of hydrocarbons.

Oil and gas production monopolize export revenues, and Russian GDP dances with oil production. Gazprom, Russia's gas monopoly, is as big as ExxonMobil. Only petrodollars could have fuelled the wasteful Olympic spending at Sochi.

Putin knows energy collapse

Let's be clear about this: Russia is a major energy exporter and global power. It plays the same role in Europe and the former Soviet Union that Texas, Wyoming and Alaska perform in North America: they, too, are red states with volatile and extreme politics.

Putin and U.S. Republicans share a common reality: they derive their power from energy revenues, and their retain their support by distributing petrodollars to their friends and allies.

Unlike the U.S. media, or Canadian politicians for that matter, Putin also knows what an energy collapse looks like. The Soviet Union experienced one in the late 1980s due to an internal oil crisis and rising oil prices.

It then suffered what Putin calls "the largest geopolitical catastrophe of the century." Stagflation, unemployment and gangsters walked over the corpse of the U.S.S.R., which, much like the U.S., spent its energy reserves badly on big armies, big space dreams and big, unsustainable unions.

So Putin, a master chessman, understands the critical importance of strategic energy flows. With just a few turns of a Gazprom valve, much of Europe freezes.

Ever since winning independence in 1991, Ukraine has been a poor blue state and energy slave. (And for much of its history, Ukraine has written one bloody political opera after another in eastern Europe: imagine a Guatemala with wheat and Cossacks.)

Half of Ukraine's gas comes from Russia, and at one time the heavily industrialized Ukraine was Gazprom's biggest and most prized customer. Ukrainians primarily use the gas to power electrical generation and heat apartment buildings.

Gas corrodes political systems

Over the last decade, Ukrainian and Russian politics have been dominated by gas wars. Whenever Ukraine has leaned too far to the West, Russia has pulled the nation back with an assortment of energy carrots and sticks. When Russia threatened to turn off the gas in 2006, Ukraine threatened to shut down the gas transit system.

The energy wars in 2006 and 2009 didn't change Ukraine's dependency, because too many middlemen make huge profits off the gas business with ritualized corruption. About one out of five cubic feet of gas passing through Ukraine goes to profiteers and Ukraine's elites. (Russia has almost completed a gas pipeline system that goes around Ukraine.)

In addition, the Ukrainian government subsidizes gas consumption in the country to keep a lid on political volatility. These subsidies, in turn, have generated a massive debt load. Ukraine, whose economy resembles many of Europe's basket cases, owes Gazprom more than $2 billion.

The International Monetary Fund recently described Ukraine's corrupt energy sector as wildly "inefficient and opaque" where "overall energy subsidies in Ukraine reached about 7.5 per cent of GDP in 2012. The very low tariffs for residential gas and district heating cover only a fraction of economic costs and encourage one of the highest energy consumption levels in Europe."

But in some respects Ukraine's energy woes aren't much different than those of the U.S., which has no energy policy other than fracking its landscapes with pornographic gusto. Two U.S. academics summed up Ukraine this way in 2009, but they could have been describing Canada, Mexico or England:

"The needs of the nation, for today and tomorrow, are consistently overridden by short-term political expediency and personal gain, creating a corrosive effect on the entire political system, as it contributes to a broad loss of faith in the political process among the Ukrainian public."

Because a few oligarchs can make a lot of money on the honeypot of fossil fuels, renewables remain less than one per cent of Ukraine's energy make-up.

US fracking cowboys kick into gear

Meanwhile, America's cowboy fracking industry (it actually spends more than it makes) has tried to make inroads in Ukraine, which has Europe's third-largest shale reserves. The cowboys talked up energy independence, because the destruction of farmland and groundwater make a poor incentive to invest in shale gas.

In 2013, the Ukrainian government signed a $10-billion deal with U.S. multinational Chevron. Shell signed a similar agreement. But these deals are now in energy limbo thanks to Putin. (He predictably disparages fracking as an environmental disaster.)

After Russia invaded Crimea, which it gave to Ukraine in 1954, U.S. Republicans, largely funded by oil and gas companies losing money due to a self-made and temporary natural gas glut, demanded quicker approval for liquified natural gas terminals.

They claimed that U.S. shale gas could bring energy dependence to Europe and Ukraine, and thereby kick Putin's arse.

But the MIT Technological Review challenged this. It noted that the U.S. has only one LNG facility, in Alaska. Another five have been approved, but only one is under construction. The complex facilities cost about $20 billion each and take years to build.

The shale business, a retirement party for industry, is also struggling with rapid depletion. It might eventually deliver some expensive gas to Europe, but don't bet on it. In any case, Putin's strategic energy advantage remains safe for some time.

The Europeans, of course, have built more LNG terminals and storage facilities in wake of the Ukrainian gas wars. They are also buying more gas from Norway and less from Russia. But they are still dependent.

The globalization and integration of natural gas markets will likely create more energy volatility, not less. Political upheaval in Indonesia, for example, disrupted gas supplies to Japan in 2003, forcing that country's utilities to burn oil instead of gas.

There will be more Ukraines

To date, Ukraine's crisis highlights a few energy truths:

• As long as energy prices remain high and fill government coffers, Putin will use energy to keep the former Soviet Union in his fold and to strut his stuff.

• It is unlikely that Ukraine will break free of its corrupt energy relationship with Russia anytime soon. Expect more oligarchs and instability.

• The West ignores its greatest vulnerability: unsustainable energy spending. Cheap energy created energy-intensive, capitalist, growth-oriented and market-driven systems, and expensive energy will unravel the miracle.

• Extreme and high-cost energy from unconventional resources, such as deep ocean oil and bitumen, with lower energy returns, has now constricted much of the industrial world and locked it in stagnation.

• Industrial nations are cannibalizing their economies to run faster on an energy treadmill. Strangely, they think Putin is mad.

• In this brave new world, energy exporters will behave like masters and energy importers will submit like slaves. And there will be more and more Ukraines.

"We think that future generations will look at our failure to think about, discuss intelligently, or prepare for the implications of peak oil, depletion of high-grade reserves of many critical metals, and continued population growth, as grand folly."

Andrew Nikiforuk has been writing about the oil and gas industry for nearly 20 years and cares deeply about accuracy, government accountability, and cumulative impacts. He has won seven National Magazine Awards …

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